Current Affairs Magazine

China crisis is no great fall

The dragon may have had its claws clipped, but David Watts makes a strong case for China’s continuing role as a major global economic force.

Beneath a clear blue Beijing sky – thanks to the lengthy closure of the capital’s polluting factories and a two-day national holiday – President Xi Jinping sat alone on a dais reviewing the massive military parade celebrating China’s victory over Japan in the Second World War.
He was alone partly because many of his leading generals and veterans had been ordered to get fit to take part in the big parade but also because he clearly wanted to be seen as the sole architect of the new, prosperous China now driving forward with the same relentlessness as the 100,000 pristine members of the People’s Liberation Army marching by.

But for a man at the pinnacle of such power he did not look happy-something that was not lost on the followers of the Chinese version of Twitter, Weibo, who took to the medium to point out how uncomfortable and bored he looked in the heat of Tiananmen Square. Those postings were quickly removed but the censors could not eradicate the malaise among the general public about an event to which they were not invited and which was clearly for the elite alone.

But even as the world looked on in concern at the gyrations in the Chinese stock markets and the slow-down in its economy, Xi’s propagandists played word games through the president’s ‘peace to all’ speech by playing a previously announced planned reduction in troop levels of 300,000 as part of this pacific approach. In reality the reduction has nothing to do with a less threatening stance towards its neighbours but everything to do with diverting the funds thus saved into the development of more modern weapons.

But that was a mere blip in the blizzard of Chinese statistics that has the rest of the world wondering what is reliable and what not, particularly in the economy. President Xi certainly has a lot to worry about beyond the turn-out of his troops. Fears for the future of his economic reform plans were most likely the ones that were clouding his visage.

Confidence in the mandarins’ ability to carry out the economic reform plan of 2013 abroad have been shaken after state institutions spent $200 billion propping up the market after the big stock market slide in mid-August but then did not follow by cutting interest rates or injecting more cash into the banking system during the following weekend.

The leap from a command economy, such as China’s, to a more liberalised one is a trick that no-one has carried out swiftly without serious dislocation. Boris Yeltsin crashed through the socialist-capitalist barrier but with devastating effects on Russian society while ending the nation’s claims to be a superpower. Everyone else has tinkered around the edges with varying degrees of success while Xi has so far managed to have the best of both worlds, with the top class economy of high spenders careening along while the unremarked, to foreigners, rust-belt industrial economy quietly founders in the background and the massive rural economy remains largely outside the calculations.

It is not as if the Chinese have not approached the reforms with the thoroughness one would expect: the 2013 plan approved by the Third Plenum of the Communist Party that November laid out a road map featuring 326 points, which experts explained would take between seven and ten years to execute.

But when markets tumbled, the government’s haphazard reactions appeared to be counter-productive and the rules of the new game had been forgotten. The party fell back on its instincts of controlling everything-including the markets.

The result was a panicked response costing billions which sought to try and stave off the inevitable. Seasoned capitalists know you have to just ride out those storms but Chinese stock-pickers have yet to get used to the concept that prices can decline just as fast as they rise and Beijing’s policies must acknowledge that reality.

More concerning for the authorities in an economy which now sees services as the bridge that will carry them from socialist economics to the bright new world of a liberalised economy is a slowing in that sector which did not develop as fast as had been expected in 2014, with an outturn of 7.8 per cent compared with an expected 8.1 per cent.

Services make up 48 per cent of China’s total economic output, compared with 43 per cent for manufacturing and 9 per cent for agriculture, according to the National Bureau of Statistics.

The uncertainty around Chinese statistics and the government’s pouring of trillions to support the renminbi has shaken confidence in the Beijing bureaucracy’s ability to manage the transition to a market economy.

IN THE SPIRIT: The government’s pouring of trillions to support the renminbi has shaken confidence in Beijing’s ability to manage the transition to a market economy

China’s foreign exchange reserves fell by some $94 billion in August as it shored up the currency, the sharpest fall on record. Perhaps as a result, Beijing will change how it fixes the rate against the dollar, saying it will follow the previous day’s close in order to make it more market driven. This will perhaps limit the large movements the currency has seen of late.

The fall in the reserves since their peak at $4 trillion in June 2014 has sparked concerns that money is leaving the country because of lack of confidence in the government’s ability to manage the economy in general and the stock market in particular at a time when it wants to inject more money into developing domestic demand.

Others believe the outflow may have arisen because of the government’s more accommodating view of money being used abroad for acquisitions and for tourism. Whatever the view, the sheer size of the country’s reserves at $3.557 trillion means that it is well placed to deal with any crisis.

Whether the government is able to make a safe transition to the new economic model without major disruption remains to be seen and reports that Xi’s reform plans have come in for strong criticism from some of his colleagues in the senior levels of the hierarchy have not been encouraging.

The danger must be now that Xi retreats to reliance on state-owned enterprises for stability as a safe route out of an unnerving experience. If it does, Beijing will be favouring special interests that are less efficient, less transparent and which have never been exposed to the competition of the market as a necessary means of upping their game.

What is clear is that the world now needs China’s development to proceed successfully.

When Deng Xiaoping pronounced that it did not matter whether a cat was black or white as long as it caught mice, launching the Chinese voyage to capitalism, the country did not rate very much in terms of the world’s economic activity. Last year China accounted for about 40 per cent of global growth so the health of the global economy and that of China are now very much tied together.

Though the economy will necessarily turn inward as it seeks to build sustainable demand at home—easing its dependence on exports to grow the economy-it will still remain a major world player ready to spend vast funds to enhance its participation in the global economy in ways that few, if any, other economies are able to do.